FINANCIAL LITERACY • 23 JULY 2021 • 3 MIN READ

What’s included in a profit and loss account?

SECTIONS

Income

Cost of sales / Direct costs

Gross profit

Operating expenses

Non-cash expenses

Non-deductible expenses

Net profit or loss for the year

We’re about to break down exactly what makes up your profit and loss account.

But first, a note.

If you’re using automated accounting software, you may want to double-check that you’re correctly classing each expense as direct costs (which impact gross profit) and operating/overhead expenses. You can find instructions on how to do it in Xero, here.

Income

Also known as sales or revenue, income can come from:

Selling goods
Providing services
Clients reimbursing certain expenses
Earning interest

Cost of sales / Direct costs

These expenses relate directly to the sale of goods or services*.

Opening stock
Purchases of goods (products to sell)
Purchase of raw materials (for processing, then selling)
Purchases of materials (materials used in the construction industry)
Freight and packaging – bringing materials and goods to you, and delivering to customers
Commission paid to salespeople
Contractors and subcontractors
Maintenance of factory plant and machinery (the more units produced, the more maintenance is required)
Wages for factory workers (if they’re based on units produced, rather than per hour)
Closing stock

* Not all businesses will have a cost of sales section. It’s usually only applicable when you’re selling goods or performing work that involves raw materials (e.g. construction). Those in the service industry are likely to exclude this section and only have expenses of an operating nature.

Gross profit

After deducting any costs of sales from income, you have the gross profit. These should be enough to cover operating expenses.

Operating expenses

These are costs that generally remain consistent, no matter the level of sales.

Advertising
Bank fees
Computer and IT expenses
Insurance
Interest
Office rent
Power
Printing, postage, and stationery
Professional fees (legal, accounting, consulting)
Telephone and internet
Salaries
Staff expenses

Non-cash expenses

Depreciation of property, plant, and equipment
Gains or losses on the sale of assets
Certain accountant adjustments, which may include

Reimbursing a director or shareholder for using part of the home as an office
Adjusting for any private portion of business expenses

Non-deductible expenses

These are business expenses that can’t be deducted from taxable income:

A portion of entertainment expenses
Certain legal expenses
Fines and penalties
Income tax

Net profit or loss for the year

The non-deductible expenses cannot be claimed as tax deductions, but they are still business expenses. After taking those into account, we arrive at the net profit or loss.

Our next article takes a look at interpreting the profit and loss account.

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